Puts and Sales of Claims Against Financially Distressed Customers: The Do's and Don'ts

Though the recession appears to be receding into the background, the current economy is still faced with mounting casualties. Corporate failures remain on the rise, with business bankruptcy filings up 65% over last year and Chapter 11 filings up 113% compared to 2008. This reaffirms the need for trade creditors to have a well-rounded strategy for dealing with financially-distressed customers. Once a customer begins to show signs of weakness that may pave the way for bankruptcy, protections like credit insurance are no longer an option. Fortunately, credit managers can utilize a third party to mitigate risks from struggling customers by selling their unsecured claim or entering into a put arrangement.

"This is really a market where the opportunity to purchase the put product or the sale of claim product could be advantageous," said Bruce Nathan, Esq., partner in the Bankruptcy, Financial Reorganization and Creditors' Rights Group of Lowenstein Sandler PC, during his NACM-sponsored teleconference, "Puts and Sales of Claims Against Financially-distressed Customers: The Do's and Don'ts." "It's kind of interesting, because I've grown up with this market. I started representing trade creditors who were looking to sell their claim, and over the past 15 years, the market for trade creditors to sell their claims and to put their claims against financially distressed debtors has increased substantially."

Tackling the issue with his usual attention to detail, Nathan walked attendees around the pitfalls of implementing third-party instruments that can monetize their illiquid unsecured claims in the event their customer files for bankruptcy, or is at risk of filing for bankruptcy.

Put agreements are specifically buyer's agreements to purchase a claim in the future at an agreed-upon price that is triggered after a customer has filed for bankruptcy, initiated an insolvency proceeding, failed to pay a claim or enacted a moratorium of payment on claims. The purchase price for a put can be 100% of the claim or less, and are beneficial in protecting against a customer's default by shifting the credit risk from the creditor to a third party for a nonrefundable fee.

"This is a great product and it sounds wonderful," explained Nathan. "But, though this is a great product for you to cash out on your claims, you really have to make sure that you tread carefully in two respects. One, do your homework so you make sure you're getting the best possible price for your claim. The first offer you receive might not necessarily be the best. And, most importantly, you have to carefully review the documentation that you're being asked to sign."

Put agreements can easily contain objectionable terms since they are drafted by the buyer, and the buyer can actually try to shift the risk of loss back to the seller of the claim by essentially having bonds or outs. This means the seller can face double jeopardy by losing out on the fee to sell the claim and then getting stuck with the bad debt.

"There's a lot of potential of getting burned here," warned Nathan. "And the burden would then require you to retain counsel and spend a lot of money to try and get out of a particular situation when negotiation of these agreements would have been beneficial and would have avoided problems."

Now that the United States has reached the one-year anniversary of the collapse of Lehman Brothers, and the financial troubles of CIT Group continued to unfold, there is the realization of the other risks apparent in put agreements and sales of claims. The financial health of the counterparty purchasing the agreement comes into play.

"These are unsecured claims," explained Nathan. "And if the counterparty is in bankruptcy, you are no better with them than you are with your financially-distressed customer unless the counterparty's case is going to realize lots for unsecured creditors."

Nathan added, "When deciding whether you are going to do a put or sale of claim, beware of your counter-party. Do a financial evaluation of your counterparty. Are you dealing with a shell? Are you dealing with a company that is financially sound? There are a lot of financial entities now that are financially distressed."

Given what's happened in the economy over the past few years, there is no shortage of distressed entities. There are plenty of funds where customers have effectively withdrawn investments and the funds themselves are facing the possibility of filing for bankruptcy. If a trade creditor sells their claim to one of these funds, and the fund goes under, the ability of the trade creditor to collect on the agreement is shot.

Nathan's presentation included a handout of more than 100 pages of information that credit managers could use to strengthen their knowledge of puts and sales of claims, including an array of example forms that could either be beneficial or disastrous for creditors.

Professionals interested in hearing the replay of Nathan's presentation can contact Tracey Flaesch at 410-740-5560 or traceyf@nacm.org.

In the original text of this article there was a point of confusion. In no way was any portion of this article to suggest that CIT Group has filed for bankruptcy or was bankrupt. The writer wants to assure readers that that was not the impression he intended by the material provided above and by mentioning the company's recent financial challenges. The author apologizes for any misunderstanding that may have occurred.

Matthew Carr, NACM staff writer

Slaying the Email Dragon

Across the nation, email has become the medium of choice for credit, finance and various other professions. It's quicker, cheaper and in many cases just as reliable as snail mail, but as the pace of business continues to increase, the potential to become inundated with messages increases with it. This, in turn, can lead one to feel overwhelmed and can cut overall productivity. To find out how to better handle emails and better process what you receive, join Abby Marks Beale for her latest NACM-sponsored teleconference, "Slaying the Email Dragon." Designed to help the busy professional more efficiently manage the daily email workload, Marks Beale's session will teach effective tools for managing, evaluating and responding to electronic correspondence. Attendees will leave knowing how to create their own strategies and techniques for managing email overload.

Struggling Banks Risk Loss of Top Performers

The staff of a supplier's bank, or their customer's bank, can often serve a vital role in the extension of credit, whether it's to reduce risk or just to iron out the wrinkles in the transaction and hopefully create the most profitable solution for all parties involved. In the wake of the financial crisis, however, training budgets have fallen by the wayside and a new study, conducted jointly by the American Bankers Association (ABA) and the Corporate Executive Board (CEB), shows that the nation's banks are at risk of losing their top talent, which could have negative ramifications far beyond the banking industry.

The study showed that, while successful companies in other industries spend an average of $1,100 per employee on training, banks only spend an average of $650 per employee. This underdevelopment of top-performing staff increases the risk that they'll leave the industry and, in the long-term, reduce overall productivity. "The study raises the question: What is being done to prepare the next generation of bank leaders?" said Doug Adamson, executive vice president of ABA's Professional Development Group. "High-performing employees have told us that in order for them to stay and be more productive, they need to be recognized as top performers and have well-defined development plans in place."

Additionally, the survey showed that training and development should mean more to the banking industry than it might to other industries due to the sector's heavy reliance on internal hiring. A hefty 60% of banks hire their employees from within, according to the study, which also noted that 40% of bank CEO respondents believed that they weren't doing enough to help their employees grow.

One culprit of underdevelopment, according to the survey, was half-established talent management policies. "We were surprised to learn that while bank CEOs are acutely focused on the importance of talent in today's market and clearly link talent management practices to their institutions' overall success, most banks have talent management practices that are only partly in place," said Adamson. "Banks will continue to compete on the quality of their employees and must help talented employees reach their full potential to build talent pipelines for the future."

In addition to surveying CEOs, the study also involved employees themselves and their opinions of their occupation, industry and overall productivity. "One quarter of high potential employees are considering leaving their organizations, and those folks put forth 21% more effort than their disengaged peers," said Managing Director of CEB's Financial Services Practice Russell Davis. "Today, every bank risks losing its future talent base." The study also showed that the economic downturn has fundamentally reduced employee productivity, with the number of employees exhibiting high levels of discretionary effort declining by 53% over the past four years.

It's Credit Words Time!

It's time to submit your credit stories for this year's Credit Words Contest. Earn cash and roadmap points if you're a winner and roadmap points if we publish your story. It's been a really tough year; we know you have stories to share about how you've made it through the worst business environment you may have ever seen. This is just one topic of many; so be creative.

Submission deadline is November 2. Read contest rules and get more information about the contest in the September/October issue of Business Credit, or by clicking here.

ABA Opposes Restrictions Applied to Lawyers in Bankruptcy Code

Earlier this month, the American Bar Association (ABA) filed an amicus curiae brief with the U.S. Supreme Court regarding the application of debt relief agency provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) to lawyers. The association believes that this restricts the ability of lawyers to provide useful and appropriate advice to clients and places privileged communications at risk of discovery.

In enacting BAPCPA, Congress cited that the law's purpose was to curb abuses of the bankruptcy system and to improve bankruptcy law and practice by restoring personal responsibility and integrity to the system. It also sought to ensure fairness for both creditors and debtors. Part of this regulation included a new category of legal entities referred to as "debt relief agencies," defined as any person that provided bankruptcy assistance to an individual in exchange for some form of payment. This meant that bankruptcy lawyers fell under this new category. For ABA, that creates problems because, under BAPCPA, a debt relief agency cannot advise a person to incur more debt, even though in some cases doing exactly that can be beneficial to both the individual and their creditors and may actually prevent the need to file for bankruptcy.

The ABA pointed out that Congress has not made it illegal for debtors to independently incur more debt when contemplating bankruptcy, but, when debtors do so on the advice of counsel, the liability now attaches to the attorney.

The association submitted that BAPCPA regulations and their application to lawyers would make filing for bankruptcy dramatically riskier for lawyers, as well as more expensive for clients and for the operation of bankruptcy courts. The ABA argues that the application of BAPCPA to attorneys would significantly undermine the attorney-client privilege, first by directly limiting the communications between lawyers and their clients and then by making those communications discoverable.

If BAPCPA's "debt relief agency" provisions are applied to lawyers, ABA also states that the historical governance of attorneys by state and jurisdiction laws would be usurped.

Matthew Carr, NACM staff writer

NACM's September Survey Now Open

The Monthly Survey for September is now open on NACM's website (www.nacm.org). This month's question deals with how you conduct your collection communication with customers. Respondents earn .1 roadmap points toward an NACM certification and are automatically entered into a drawing to win a free teleconference registration! Click here to participate today.

As part of its ongoing quest to increase tax compliance, the U.S. Department of the Treasury recently signed an agreement with Monaco to allow for the exchange of information on tax matters between the two nations. The move will allow the U.S. to access the information it needs to investigate and prosecute violations of tax laws and hopefully further reduce the nation's tax gap, which represents the $345 billion in annual taxes that are legally owed but never collected.

"This administration is wholeheartedly committed to combating offshore tax evasion," said Deputy Secretary Neal Wolin, who signed the agreement with Monaco Minister Franck Biancheri in Washington. "We are working with countries like Monaco to ensure that the Internal Revenue Service (IRS) has access to the information that it needs to enforce U.S. tax law. Today's agreement serves as an example for other financial centers around the world and reflects our continued efforts to end the use of offshore accounts as a tool for tax evasion."

This most recent Tax Information Exchange Agreement (TIEA) with Monaco falls into an ever-lengthening list of actions taken by the administration to increase enforcement of tax laws worldwide. At the Group of 20 (G20) Leaders' Summit, held in London last April, the U.S. voiced its support for efforts to ensure that all countries adhere to international standards for the exchange of tax information. Since then, the Treasury has also reached agreements with Gibraltar and Luxembourg to allow for a smoother exchange of information. Additionally, in June, the Treasury amended its income tax treaty with Switzerland to provide for more tax information exchange and, just last month, the IRS reached a settlement with global Swiss financial services giant, UBS AG, which required the firm to turn over information on 4,450 accounts suspected of being used to evade U.S. tax laws.

As is the case with most TIEAs, only specific tax authorities will be permitted to receive and send sensitive tax information and the data exchanged can only be used for tax purposes. U.S. authorities will be able to collect information from Monaco, beginning in 2010, on all types of taxes in both civil and criminal matters regarding tax year 2009 and onward.

Jacob Barron, NACM staff writer

Speaking Proposals for Las Vegas

NACM is currently accepting speaking proposals for the 114th Credit Congress & Expo in Las Vegas.

Join us in the city of lights from May 16-19, 2010.

The deadline for proposals is September 25, 2009. Proposals must be made online. To submit yours, click here.

Cap and Trade's Potential Impact on Farmers Probed

Almost as divisive as healthcare, the proposed legislation on climate change and carbon cap and trade has stirred its own war of words. Entities on both sides of the issue have funded reports detailing destruction and salvation, not only on the national economic level but the industry-specific as well. One of the industries weighing in on the subject is agriculture: after suffering through a dairy industry collapse and farm incomes that have fallen nearly 40% from last year, the industry is reticent to succumb to any further potential financial woe.

A recent study by Texas A&M University's Agricultural and Food Policy Center (AFPC) has added its findings of the proposed cap and trade legislation's impact on American farms to the ever-broadening library of evidence. The report was released just days before the Senate Committee on Agriculture, Nutrition and Forestry held hearings on the proposed cap and trade system ofÂ The American Clean Energy and Security Act of 2009 (ACES), which passed the House of Representatives in June. The bill requires a 17% reduction from 2005 levels in greenhouse gas emissions by 2020, striving for an 83% reduction by 2050.

According to the AFPC study, "Economic Implications of the EPA Analysis of the Cap and Trade Provisions of H.R. 2454 for U.S. Representative Farms"â€”which was conducted at the request of Senate Agriculture Committee Ranking Member Senator Saxby Chambliss (R-GA)â€”passage of ACES would largely have negative impacts for the 98 simulated representative farms in AFPC's database.

The ground-truth that this study shows is very serious," said Chambliss. "The study says that 71 of the 98 farms will be worse off under the House cap and trade plan, even in the early years of the program."

The AFPC concluded that dairy, cotton and rice farms, as well as ranches, would experience lower cash receipts during the years projected in the study, from 2010 to 2016. Rice farms and cattle ranches would carry the biggest burden since they would not likely participate in carbon sequestration activities, and would have to cope with higher input costs that would outpace increases in their product prices. For example, the 14 rice farms in the model would experience lower net income between $30,000 to $170,000 from 2010 to 2016 under ACES. The pain of these declines would be further felt as annual costs would increase between $20,000 to $120,000, depending on the farm.

According to AFPC's estimates, not all farms would suffer, particularly feedgrain and oilseed farms located in the Corn Belt of the Great Plains. But the success of those farms in the simulation was double-edged. "Most concerning, the 27 farms that benefit do so only because other producers go out of business," said Chambliss. "Not one rice farm or cattle ranch benefits, while only one cotton operation and one dairy benefit, mainly due to the fact that they both grow a significant amount of feed grains."

A similar study conducted by the Nicholas Institute for Environmental Policy Solutions differed from the AFPC's, and actually found that farms would benefit from cap-and-trade legislation, with revenues generated from carbon trade outpacing increases in operating costs.

"The study also forecast some losses in economic welfare to consumers and agricultural processors," admitted Timothy Profeta, director, Nicholas Institute, in testimony before the Senate Agriculture Committee. "However, benefits to crop and livestock producers far outweigh these economic losses, signaling gains to the sector as a whole. If done the right way, agriculture can be made a winner in climate legislation."

He added, "No matter what the models show, no one would dispute that we should adopt the policy that achieves our goals at the lowest possible cost."

Much like healthcare, climate change legislation is an emotional topic. It is another issue that demonstrates partisanship is far from dead in the United States as the two sides are divided along party lines. ACES squeaked out a victory in the House and campaigns against the legislation picked up speed during the Congressional hiatus in August. The agriculture industry finds itself in the middle of the debate because the Environmental Protection Agency (EPA) estimates that agricultural and forestry lands can sequester at least 20% of all annual greenhouse gas emissions in the U.S., while livestock and agricultural conservation practices are some of the easiest to implement to immediately reduce emissions.

It is also the industry in the United States that will be the most affected by changes in the earth's climate and global warming. As to that, Utah's Republican Governor Gary Herbert famously promised last month that he will host the first legitimate debate later this year on whether the actions of humans even contribute to climate change.

Matthew Carr, NACM staff writer

Partner With Someone You Can Trust

NACM Affiliate collection departments collect your past-due accounts, large or small, as quickly as possible. NACM collection departments are firm, but fair, with your customers, with the primary objective to collect your money.

Usually, the first step after the account is placed is to notify your debtor and make an immediate demand for full payment. The intensity of phone calls increases if payment is not made. If direct personal contact is appropriate, NACM Affiliates have many resources, including the ability to draw on a nationwide network of Affiliates. When necessary, NACM Affiliates will forward an account to one of the bonded attorneys in its tried and proven network. NACM Affiliates exhaust all collection possibilities before recommending litigation to you. All funds collected are placed in separate trust accounts.

U.S. Chamber of Commerce Mounts Opposition to Obama's Regulatory Proposal

Much has been made of President Barack Obama's proposed financial regulatory overhaul, the most notable provision of which would be the creation of a new agency, with jurisdiction over consumer financial products, called the Consumer Financial Protection Agency (CFPA). No opponent of this specific proposal has been more outspoken than the U.S. Chamber of Commerce, which recently doubled down on its opposition to the agency with a new grassroots and media campaign aimed at blowing the lid off of what the organization considers a dangerous proposal.

"The Chamber supports strong consumer protection, but a massive new bureaucracy with sweeping powers that will deprive consumers of affordability and choice is not the answer," said David Hirschmann, president and CEO of the U.S. Chamber of Commerce's Center for Capital Markets. "That is why we're launching a major offensive to inform Americans the CFPA is the wrong answer to consumer protection."

Specifically, the Chamber is fighting H.R. 3126, a bill proposed by Rep. Barney Frank (D-MA), chairman of the House Committee on Financial Services that would establish the CFPA. Among the negative consequences the bill would have, according to the Chamber, are crippling new regulations, increased credit costs and new taxes on dozens of industries.

In a release announcing the kickoff of its campaign against the agency, the Chamber said the CFPA would be able to regulate hundreds of thousands of businesses that either directly or indirectly extend credit to their consumers, meaning it could affect businesses that lend to smaller customers or sole proprietors and even businesses that simply allow customers to pay over time. Additionally, the Chamber said that the CFPA could also regulate anyone who seeks to offer advice to credit-extending businesses and could control what products are sold to whom, how they are sold and how much they cost.

The initial stages of the Chamber's fight against H.R. 3126 will begin inside the beltway and expand to television and radio advertisements nationwide. In general, the ads will highlight the potential for unintended consequences and deride the bill as an example not of consumer protection but of bigger government. "The unintended consequences of this bill are jaw dropping," said Hirschmann. "Whether you're a jeweler or a butcher, a retailer or an IT provider, this new agency would have sweeping powers to regulate over 45 industries and add yet another layer of government bureaucracy to an already disjointed and dysfunctional system."

The last major action on H.R. 3126 took place in early July when it was referred to Frank's Committee on Financial Services and to the Committee on Energy and Commerce, so that each can consider provisions that fall within their specific jurisdictions.

Jacob Barron, NACM staff writer

Look for the "A" Players

You need the "A" players. They're the most qualifiedâ€”the most productive peopleâ€”in your organization. And, for any open positions you have, you need them fast because any interruptions in staffing can mean missed deadlines, a breakdown in operations and loss of productivityâ€”consequences you can't afford.

Chinese Manufacturing Making a Rapid Comeback

The manufacturing sector in China expanded for the sixth straight month in August, and in the process set a 16-month record for expansion. The drivers for this recovery are diverse and that bodes well for continued growth. The latest Chinese version of the Purchasing Managers Index (PMI) showed substantial improvement in a variety of categoriesâ€”new orders, output, imports and employment. Interestingly enough, exports were flat for the month and that would indicate that much of what has been driving the sector has been internal. There had been some concern that efforts to curtail all the lending activity that has been shoving China toward a financial bubble would slow down this sector, but thus far that has not been the case. The PMI for China is now at 54â€”up from the 53.3 level seen in July. This is a substantial improvement from the numbers seen even six months ago.

The expanded role of the Chinese consumer is the big story in manufacturing at the moment. The demand from within China is rivaling the demand from the export sector and the consumer is far more diverse in their acquisition demands than in the past. Acquiring a car is still the number one desire but the need for appliances and other devices has grown as well. The Chinese consumer goods manufacturer has started to aggressively market to the domestic consumer and that is somewhat unprecedented as most of the industrial sector has long been pointed outward. Now there are brand campaigns aimed at the Chinese buyer as well as foreign ones.

The limiting factor for Chinese growth will still be global demand as the domestic economy is far from ready to shoulder the entire burden of sustaining the Chinese economy. There is also concern that at some point the efforts to curtail credit will hurt the Chinese manufacturing sector as it may not be able to access capital the way it has in the past.